If your dream home seems an impossibility because of a less-than-stellar credit record, take heart. Improving your credit isn't that difficult. All it takes it a bit of time – and financial discipline.
Credit ratings are based on the FICO score, which calculates different pieces of your credit data and comes up with a number indicating how high of a credit risk you are. (FICO comes from the Fair Isaac Corporation, the company that developed the credit risk model in the 1950s.) Payment history, amounts owed, new credit, length of credit history and credit mix combine to create the score. The scores range from 300 to 850; the higher the score, the better the credit.
Most lenders won't approve loans with scores less that 599. Those with excellent scores – 760 or higher – can shop for better rates.
So how do you raise your credit score? Here are a few easy steps:
1. Don't be late.
One of the best ways to raise your credit score is by paying bills on time. Any late bills, whether it's for the utilities or your VISA card, can put a dent in the credit rating. Missing a few payments can really hurt the score. One way to ensure that you pay bills on time is to set up automatic online payments.
2. Reduce debt.
Although this is probably the most difficult step to better credit, it's one of the most important ones. Start by paying off the credit card with the highest interest rate. At the same time, maintain timely payments on your other cards. Using more than one card can be good for your credit as long as you don't pay down one card by using another.
3. Don't overload the card.
Keep your credit card balance well below the limit – ideally, around 30 percent of the limit – and pay it down or, better yet, pay it off every month. If a card has a high balance one month, consider paying it early. Part of your score is based on the amount owed, so even if you're planning on paying it in full, the high balance could affect your score.
4. Keep old accounts open.
Because credit history helps determine part of the score, having long-established accounts is a positive factor. Instead of closing an old account, consider using the credit card once a month – and paying off the balance – to keep it active. If you feel as if you have too many credit cards, close the newer accounts first. Remember, closing an account will not immediately erase the account from the credit report.
5. Check your credit report.
Studies show that credit reports do have errors on them. Ask for a credit report and go through it carefully. Report any errors. The Fair Credit Reporting Act requires credit agencies, banks and even merchants to correct documented errors. A free credit report can be obtained every 12 months from the three major credit agencies: Equifax, Experian and TransUnion (see AnnualCreditReport.com).
With these simple measures, you can see your credit scores rising after just six months, getting you another step closer to homeownership.